- Due to the unprecedented situation, no one is certain whether Bitcoin will be able to pass the litmus test of increasing interest rates and inflation.
- Some experts have offered their opinions on the so-called “crypto winter” which has brought the markets to their knees.
Bitcoin (BTC), and indeed all risk assets including crypto mining and tech stocks, has been in free-fall since last week, after the Federal Reserve announced a 50 basis point interest rate hike.
Recession fears, coupled with rising interest rates, have caused financial markets to tumble. As such, a Hamletian dilemma has arisen for traders who find themselves unsure whether to buy or not to buy the Bitcoin dip. In the midst of this crisis, uncertainty reigns for the future of investments into this and other crypto assets.
The crypto winter is an unprecedented situation for digital assets, which did not yet exist in the crisis of 2008. It is also believed that Bitcoin failed to gather enough strength in the wake of previous Fed adjustments that were made between the years 2016 and 2019.
On this occasion, the aggressive measures undertaken by the U.S. central bank to contain inflation may see rates rise above 3% by early 2023, according to market analyst forecasts.
BTC Has No Experience in Financial Crises
The level of risk for crypto investors is at an extreme high. With Bitcoin lacking experience in dealing with financial crises or high interest rates, it is quite risky to buy the dip, experts say.
The price of Bitcoin has been in free-fall since last week. As of Wednesday at 9:03 am (ET), the leading asset was even trading as low as $29,279, according to CoinMarketCap, the lowest level seen since July last year.
"This isn't the first time that we've reached this level, and the risk-reward ratio for picking up bitcoin here has been very good in the past year or so, but we are seeing a different macro backdrop," underlined Matt Dibb, COO of Singapore-based crypto platform Stack Funds. However, he specified that “the concern is [that] this time is different with respect to whether we will see continued weak sentiment in traditional financial markets, which is likely given the inflation outlook and the likelihood of increased rates in the next few months or years”.
“The era of free money is over”
The market continues to expect further interest rate hikes in June and July of another 50 bps. It is not even ruled out that another increase will take place in September. These movements pose profound changes in the way in which they had been investing in high-risk assets.
“The era of free money is over,” said Los Angeles-based Bitcoin IRA COO and co-founder Chris Kline. “There's a large adjustment of investor appetite happening right now.” The other cryptocurrencies are in a similar situation with Ether falling in parallel on Wednesday mid-morning to $2,189. While other altcoins continued to be sold in high volumes.
“The more speculative altcoins are going to struggle, as we've seen in past volatile times in the crypto space,” Kline said. “Bitcoin is considered risky, but some altcoins are at an even higher risk and those will have even larger sell-offs.”
On the Flipside
- The big question now is whether or not investors will see cryptocurrencies as appropriate diversification assets for times of crisis.
- If digital assets are only considered viable during the good times, they could lose much of their value in the market.
In reality investment values are crashing across all sectors, including stocks. The inflationary crisis and fears of recession are causing a value readjustment in the market—a necessary correction in the opinion of some analysts.
"What's interesting is that bitcoin itself hasn't declined quite as much as the Nasdaq and some other asset classes, but the correlation has tightened between them," Benjamin Dean, director of digital assets at WisdomTree in London, said to Reuters. "It's certainly a higher correlation than we've seen in the past," he added. For some analysts, the recent liquidation of cryptocurrencies and other assets is not an unusual situation and occurs in traditional markets on a regular basis.
“From my perspective, two-way price action and occasional washouts are healthy for markets, including crypto,” explained Brandon Neal, COO of cryptocurrency lending platform Euler. But he added: "we've never seen crypto in a recession, and it's anyone's guess what will happen."
